Steps to Buying a Business

How to Buy a Business

One of the most common questions asked by those who have never purchased a business (which is incidentally about 90 percent of those looking to buy a business) is how do you actually buy a business. There is no right or wrong way to buy a business. However, it is important that you know what information and steps are necessary to make an informed decision.

Determine what your price range is:

Firstly you need to understand that to purchase a business you definitely need more than a 10% deposit:  It's important that you have realistic expectations about what your money and assets will buy.  The size of the business you purchase depends on your present financial worth and your ability to borrow money. If you are in a position to pay cash for the business you are properly setting your sights to low or you are already in business, however if you are one of the 99.9% of buyers who is purchasing a business and needing to borrow you will have to be convinced and convince your funder of the following:

(a) That you have enough security to protect the funds borrowed. A secured loan is a promise to pay a debt, where the promise is "secured" by granting the person or company lending the money an interest in specific property (collateral) of the person or company being lent the money. For example, your house is security (collateral) for your mortgage. Note: The business you are buying also has collateral in the way of property if freehold, plant & equipment, debtors and stock.

(b) The business is capable of servicing the loan. To finance your business purchase, your lender is likely to want to see a cash flow budget, from your accountant, showing the anticipated cash receipts and disbursements of the business on a month-to-month basis, and proving that the business can both make the anticipated loan payments and has the ability to support you, the business owner. The primary purpose of using a cash flow budget is to predict your business's ability to take in more cash than it pays out over a certain period of time. Even if you're not financing the purchase, you should consider creating such a budget (or, more likely, having your accountant do it for you). Your accountant using the past financial profit and loss statements and having consultations with the accountant of the present owner normally constructs the business-projected cash flow.

(c) That you are capable of operating this business. A lender should need “not to obtain any doubts” that you are both physical and mentally capable of operating the business. In other words should you be considering purchasing a one man lawn mowing business and you are restricted to a wheel chair by recurring leg problems it is unlikely, unless on one of your better days you walk into the lenders office, that you would be likely to obtain funding even if you owned 10 houses as security.

What type of Business

In choosing a business, make life as easy as possible. Remember, you will spend a lot of time and money and will exert a lot of energy in whatever business you choose. Do you like cars, stamps, music, art, dance, cooking, teaching, reading, woodworking, building, repairing, sewing, gardening, computers, writing, planes, travel, or sports?     Are you good working with people? Are you good working with your hands? Do you feel that you would be able to sell things to other businesses? Then, why not explore business opportunities in these areas?.

Search on business in the categories that you can imagine you would be comfortable in operating and that you believe you have or can acquire the necessary skills to operate these businesses. There is no sense in looking at transport businesses if you hate the smell of fuel, don’t like driving and don’t know the front from the back of a truck.

From the search result under this chosen category you will be able to determine if the asking price for these businesses is within your price range and that the net returns of these businesses are in line with your requirements to service a loan and support your family.

Remember you can get  to e-mail alert you when new businesses are listed for sale in your area.

Get the Basic Facts

Get preliminary information on location of the business, description of the business, price of the business, approximately the stock value, the turnover of the business, the net return of the business, operating days and hours, number of staff employed, how long the business has been operating for and how long the current owner has owned it, the owners reasons for selling and if the premises are leased or freehold if leased the terms of the lease.

There is no point in continuing the buying process of this particular business if the preliminary information is not what you are looking for in a business, maybe the lease is only for 6 months, the business operates 7 days a week or there are large numbers of staff employed and you can’t handle managing staff. The business has to be able to meet your basic financial and lifestyle needs. You always expect a business to improve under your ownership, but you have to be able to meet your living expenses as well as meet the debt service of the business and still be able to spend time with the family. 

>Get the full Selling Memorandum (profile)

If you like the business so far, contact the seller or broker or have the seller contact you, and request a selling memorandum or profile of the business.

A Selling Memorandum or profile would normally include information on:

What is for sale, were (address) and for how much.

Photographs of the business premises and interior.

Information about the business's history (who started, when etc).

The market in which the business competes.

The company's products, its operations and source of products or raw materials. Operating days and hours of the business.

Management, staff numbers and positions.

The reasons for selling.

Particulars of the premises leased and lease or if freehold, the value of the freehold. A copy of the financials (profit & loss statements) from the seller’s accountant.

A list of plant & equipment that is being sold with the business.

Normally before a seller or broker will supply you with a full selling memorandum they will want to have a confidentiality agreement signed by you to protect their business from such things as their competitors receiving their sales history and operating costs.

Remember sellers will be keen to preserve confidentiality. Realize that they need to qualify you as much as you need to qualify the business. It's a two-way street, and both parties need to share information about each other, you have some of their information so share information about yourself up-front.

Try to prove you're a serious buyer prospect- Agree to confidentiality. If you have relevant business experience, make sure they know about it. Make sure they know you are motivated by more than idle curiosity. Make sure they know you are not gathering information for competitors.

If you think the business might be outside your financial capacity or you are not sure if you are capable of operating the business, say so up front and let the seller advise you on what he/she believes you will require in the way of finance and expertise. It might well be that he/she will leave some funding in the business (vendor finance) and stay on for an extended period of time to provide you with expertise

Get a feel for the business

Make an appointment with the seller to inspect the business and visit the business to see if you like the feel and the looks of the business itself - both inside and outside. This is a visual inspection and a time to talk to the owner concerning any parts of the business you are not sure about or generally having his/her and your questions answered.

Accountants & Outside advisors

Now is the time to bring in any outside advisors you may want to use to obtain information about the business. You should have an accountant review the figures to verify them, compare the business to industry standards and contact the seller’s accountant to clarify any items not understood. From the profit & loss, plant& equipment, valuations and the other information collected, you, your accountant and if you are using one, your business broker can arrive at a high and low price range that you would pay for this business.

Make an Offer

If you now have your questions answered by your advisors and you want to proceed with purchasing this business, it is time to make an offer, subject, of course, to verification of all the information you have received and certain conditions. The main purpose in making an offer is to see if the seller will accept your price and conditions of the sale and thus allowing a contract of sale to be put into place. Remember, you will have the offer subject to obtaining finance, verification of the important information and other clauses. It doesn't make sense to employ outside solicitors and advisors and go through the time and expense of due diligence, cash flows and funding unless you can come to a mutual agreement of price and other major conditions. It is also common sense to consult your accountant as to the best vehicle in which to own and operate the business for example: sole trader, partnership, company, trust etc.

Before the seller and the buyer consult their solicitors to draw up the contracts of sale it is important to arrive at a meeting of minds on the following points:

Mutually agree on a price to be paid for the business and if possible the apportionment of price between property, goodwill, fixtures, fittings, plant and equipment.

Mutually agree on an acceptable deposit.

Mutually agree on what the maximum stock value will be.

Mutually agree, if the business has work in progress, what the value will be.

Mutually agree on the training time the seller will allow before the settlement and the time he will spend in the business after settlement.

Mutually agree on the settlement date allowing enough time (14 to 21 days) for finance to be obtained and the letter of finance approval obtained. Allow another 14 days for searches and documentation to take place.

Mutually agree on any clauses or conditions that either party might require.

The seller can, after the above items have been discussed, supply to his solicitor the name of the buyer, the buyer’s solicitors name, the buyer’s accountants name, a full list of plant & equipment which is being sold with the business, a copy of any lease agreements on plant & equipment which the new owner is taking over, and this Mutually agreed information so as a draft contract can be prepared for the buyer who with his solicitor can peruse and modify before a final contract is drawn and executed.

The solicitors will add restraint of trade clause, clauses for transfer of business name- copyright- trademarks- patents etc, transfer of phone numbers etc, conditions on assignment of the lease or a new lease for the premises (copy should already be prepared and annexed to the contract) and other necessary conditions.

The solicitor’s will be, and should be, looking after each party’s interests; however, both buyer and seller need to remember that the other party’s interests must also be considered.   The transaction must be fair for all parties. The solicitor works for you, and you must have a say in how everything is done.

Due Diligence

At this point, you have obtained an option to buy this business subject to the conditions set out in the contract. One of these conditions is subject to finance which to obtain you will most likely need a Cash- Flow budget from your accountant. Your accountant using the business past financial profit and loss statements and having consultations with the owner and his accountant will  normally construct the business cash flow budget for you. During this process your accountant normally has been removing the contingencies and performing what is commonly called due diligence and verifying the figures.  Now is the time to bring in any outside advisors you may want to use to verify the information about the business. You should know most of the information, but you may want to have an electrician check some equipment or an engineer checks something or what ever.

Once all the purchase conditions have been eliminated  - your pre- settlement training is completed it is time for the settlement. Now the business is yours - congratulations!